I am a software entrepreneur who is currently an investor and board member in three startup companies. I have a B.S. in mechanical engineering. I was born in 1948. This chapter of my life is about trying to help people make their dreams come true. I started writing about economics because I hate the way that our dysfunctional economy is crushing the dreams of so many people. Young people are delaying getting married and having children because of unstable jobs and incomes. It doesn't have to be this way, and I want to contribute to solving the problem. I believe that prosperity is possible.

Thomas Piketty Gets The Numbers Wrong

Given the excitement that Thomas Piketty’s new book, Capital in the Twenty-First Century, has stirred up within the political left, the French economist probably should have titled it Fifty Shades of Inequality.

In Capital, Piketty presents a painstakingly researched case for doing what progressives ranging from Paul Krugman to Barack Obama want to do anyway, which is to raise taxes and expand the power and reach of government. Unfortunately for liberals, Piketty gets almost everything wrong, starting with the numbers.

Piketty claims that capitalism is in crisis, because the importance of capital in our economy is growing, the “Top 10%” owns most (70%) of it, and the “Bottom 50%” owns almost none (5%) of it. However Piketty’s numbers ignore the capitalized value of Social Security, Medicare, and our other welfare state programs. These programs are huge, and they disproportionately benefit the “Bottom 50%.”

Social Security Card (Photo credit: 401(K) 2013)

Social Security and Medicare are “pay as you go” social programs (which Piketty calls “PAYGO”). While Social Security and Medicare may not add anything to the physical capital of the economy as a whole, from the point of view of the individuals enrolled in the programs, they represent capital. Specifically, the Social Security and Medicare contributions function as forced savings, and the benefits function as annuities. And, Piketty certainly counts annuities owned by “the rich” as part of their wealth.

Social Security and Medicare are structured such that the capital accumulation from the forced savings of the lower income classes is heavily augmented by subsidies paid for by the higher income classes.

The ultimate example of this might be the case of the first Social Security benefits recipient, Ida May Fuller, who was definitely not in the “Top 10%.”

Ms. Fuller received about $180,000 in Social Security benefits, in return for a bit more than $400 in contributions (both numbers in today’s dollars). And, she also received 10 years of Medicare coverage for nothing.

Living requires income. In Piketty’s model, there are only two kinds of income: income from labor, and income from capital. Because Ms. Fuller didn’t work for the last 35 years of her life, she must have lived off income from capital. Ms. Fuller must therefore have owned significant capital (in the form of her claim on the Social Security Administration) when she retired in 1939. Because Piketty’s wealth distribution numbers do not take this form of capital into account, they are simply wrong.

But wait! Social programs are just promises by the government to pay, and they could be repudiated at any time.

Yes, but government bonds are also nothing more than government promises to pay, and Piketty counts them as private wealth. Government bonds can be (and have been) repudiated, both directly (Argentina, Greece) and via inflation (almost everywhere).

Because high earners receive a return on their contributions that is lower than the interest rate on federal debt, the entire “unfunded liabilities” of Social Security and Medicare must logically arise from the benefits promised to the “Bottom 50%.” Let’s see how taking these unfunded liabilities into account would affect Piketty’s numbers.

Piketty estimates that, in 2010, the U.S. had total national wealth of about $54 trillion. The “Top 10%” owned 70% of this, the “middle class” (the next 40%) held 25% of the total, and the “Bottom 50%” owned 5%.

If we assume that the (75-year) unfunded liabilities of Social Security and Medicare ($9.6 trillion as of 2010) will ultimately be dealt by taxing “the rich” (i.e., the “Top 10%”), then the true U.S. wealth distribution in 2010 was actually much different than the one that Piketty describes.

After adjustment for the capitalized value of Social Security and Medicare, in 2010, the “Top 10%” actually owned 52.2% of national wealth, not much more than the 50% observed for this group in 1970s – 1980s Scandinavia, which was the society with the lowest inequality that Piketty has ever found. And, the “Bottom 50%” really held 22.8% of total wealth, close to the 25% that Piketty believes would pertain in an “Ideal Society.” (See Table 7.2 in Capital.)

But wait! There’s more! Specifically, there is a lot more to the U.S. welfare state (which Piketty calls “the social state”) than just Social Security and Medicare.

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OK I will spell it out for you as its clearly necessary. Do you practice that statement in a mirror to see if you can keep a straight face?

You honestly, as a sane and lucid human being, hand on heart, believe that someone inventing something that is of huge value to society and getting wealthy by it is an argument *against* massive and obscene inequality of both wealth and income on a global scale ? Really???

As for getting wealthy on an invention – this might come as a shock to you (you’re American presume but there are people with the same twisted views in other countries as well) but not everyone is obsessed by how rich they can get.

British inventor Tim Berners-Lee could have been the richest man in Earth by a very long way (and he knew it) when he decided NOT to patent the web browser. There are plenty of examples like him going all the way back to Marie Curie deliberately not patenting the radium isolation process (which incidentally many US industrial companies got rich from).

So no, I didn’t miss the pathetic point that the statement raised. I did however notice the hugely irrational thinking and twisted logic that it represented. Its the sort of retarded argument spewed out to the dull witted masses by certain right wing media organisations to try (very very badly) and deflect attention from the crooked, tax dodging, justice evading, thieving, begging-in-a-crisis bunch of super-wealthy nut jobs our entire civilisation is fast becoming enslaved by.

I agree with the OP and with Zekester. Piketty elevates the reduction of inequality as the only goal over all other considerations; he pays little or no attention to the good/great things people do that happen to make them rich, let alone the good/great things people do in the hope of becoming rich when they don’t always do so.

So your argument is that Piketty is wrong about needing to raise the taxes on the wealthy because we will be forced to raise taxes on the wealthy to pay for Social Security and Medicare benefits? Seems to me that you are agreeing with him at least on the need to redistribute wealth from the rich to the poor. That is of course assuming this even happens as it seems clear that the wealthy have been very successful in recent history at confusing the issue to the point where they have convinced a large segment of the population to vote against their own interest.

I stopped reading when the author decided to use an outlier, Ida May Fuller to support an outright dishonest argument on welfare payments. At that point I knew the author was not serious and had no intention of making a scientific argument but a thinly disguised apology on behalf of the wealthy. At no point did he make a single argument that refuted the book’s main thesis.

An argument almost always made for a free market is that it maximizes the “common utility.” This article is no different. As a professional economist for over 45 years, I would not dispute this statement and the author makes the economist’s case for it quite eloquently. He states

“Under American capitalism, the ultimate arbiter of “common utility” is the market. A free market is designed to maximize “common utility” by processing the preferences of 317,000,000 people, expressed in the form of voluntary offers to buy and sell, into an optimum allocation of resources and an efficient coordination of efforts.”

The problem is that statement is true for any given distribution of income. In other words. the free market guarantees that it’s operation will maximize the common utility of its participants no matter what distribution of income exists at a given time. Also, economists recognize that utility itsself cannot be directly measured with any real degree of accuracy. So the highest (maximum) utility possible out of all utility levels generated by each different distribution of income cannot be accurately measured either. Consequently the “best” distribution of income that will allow a society to achieve the maximum possible level of the common utility cannot be accurately identified. An argument that the current distribution of income is the best one is simply justifying the status quo and has no empirical basis.

My understanding in reading the book was that social security was encompassed in Pikkety’s discussion of public pensions. It is not called ‘Social Security’ in France, but his book was clear in those sections that addressed public pension (paygo) systems, so this Forbes article would appear to be much ado about nothing. I will say that one has to think a moment when reading that chapter, as ‘public pension’ here tends to immediately focus our attention, here in the US, on such things as pensions for teachers, police, etc. As a previous poster here wrote, there are some hazards in translation, but I found Pikkety to be quite concise in his definition of terms.